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Thursday, January 23, 2014

Much to do about #kangkung

Fluctuations in the prices of goods and services are part and parcel of any economy.

UNDERLYING the furore surrounding kangkung brouhaha lies a much more fundamental political question. Namely, should we blame the Government for increases in the price of goods and not give the Government credit when the price of goods decrease?

Prime Minister Datuk Seri Najib Tun Razak is at least half right when he questions the fairness of blaming the Government for rises in the price of let’s say, vegetables as a result of uncontrollable factors such as changes in weather conditions.

But if we should not blame the Government for uncontrollable increases in the prices of vegetables, surely we cannot praise the Government when the price of the same vegetables decreases? Gyrations in the prices of goods and services are part and parcel of any economy especially one with a decently functioning market for these goods and services.

Demand and supply forces work in the short term to determine prices, which means that prices would sometimes go up and sometimes go down. And while we will inevitably gripe when the cost of goods increase, most fair minded people would not heap the blame on the Government when they know that the cause of these price hikes are beyond the control of the Government.

This is what should be understood: the rakyat is not blaming the Government for short-term price hikes as a result of uncontrollable factors. What the man on the street is increasingly incensed about is the across-the-board price hikes this year, and most probably next year, being directly or indirectly the result of government policies.

The increase in the price of sugar is the result of the Government’s withdrawal of the sugar subsidy. The increase in the electricity tariff is the result of the approval of government agencies, notably the Energy Commission.

The expected increase in the toll rates later this year is the result of badly negotiated contracts in these public-private partnership agreements, which give excessive profits to the concessionaires. The introduction of the 6% Goods and Services Tax (GST) is a result of the Government to cut its own excessive spending and reduce wastages. This is what the average man on the street is blaming the Government for.

Of course, some may argue that these price increases are necessary and positive for the country moving forward as part of the larger plan to restructure the economy by rationalising subsidies and reducing its distortionary effects. The GST too, they argue, is a fairer system since it is a more broad based tax and also reduces leakages which currently exist in the system.

While these arguments may appear rational and reasonable, it quickly falls apart upon closer examination. Moves at restructuring the economy by withdrawing subsidies addresses only the price distortion aspect without correcting the distortions in the supply side of the market.

Take sugar for example. Why is it the case that economic restructuring does not entail allowing more than just the current two sugar manufacturers to operate in the Malaysian market?

Surely the entrance of more players into this market would increase competition and possibly even reduce the price of sugar even after the removal of subsidies.

Similarly, allowing Tenaga to increase the electricity tariff due to needing future investments in the grid but not set strict and transparent KPIs for Tenaga to manage it costs comes across as yet another lop-sided government policy. Also, why should toll concessionaires enjoy profit rates in excess of 40% when the internal rate of return stipulated in many contracts is only 12%?

Incidentally, according to the latest figures issued by the Department of Statistics, the price of water spinach – yes, kangkung, by its other name – actually increased by 7.7% in November 2013 compared to the previous month, the second highest increase after sugar (10.3%). So, by right, the Government can’t even take credit for the decrease in the price of kangkung.

Dr. Ong Kian Ming is the MP for Serdang. He can be reached at im.ok.man@gmail.com. The views expressed are entirely the writer's own.

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